Financial advisors are in the trenches when it comes to making sense of markets and finding the right investment solutions for various client investment goals.
With that in mind as we approach a new calendar year, we ask some of them what’s top of mind in their ETF universe.
Here, three advisors share some of their top ETF picks and best investing ideas for 2021.
Sam Huszczo, founder and investment advisor, SGH Wealth Management, Southfield, Michigan
Top Pick: Invesco S&P SmallCap Quality ETF (XSHQ)
We view the quality factor in small cap stocks as a modern refresh to the size factor in the making of Fama-French 2.0.
The empirically verified size factor, which refers to mid- and small cap stocks generally outperforming large cap stocks, has been disappearing since the early ’90s due in part to increased competition. This dilution is seemingly restored if one can control the junkiest of the junk through screening for metrics like earnings quality and leverage.
By avoiding the “lottery ticket” equities in the small cap space, the robust size premium is present across more historical periods, across different industries and different measures of size. This, along with 2020 being all about the mega cap stock, gives us confidence that small cap stocks will continue the progress they made in Q4 2020, and further close the gap with large caps moving forward.
Matt Carvalho, chief investment officer, Cardinal Point Wealth Management, in San Jose, California
Top Pick: ARK Innovation ETF (ARKK)
Coming out of the carnage of Q1 2020, we wanted to introduce a satellite component to our clients’ holdings, which focused on some areas that could see exponential change from what we saw as dramatic shifts to our economy. Last April, we added ARKK as a holding for several reasons.
Looking at an economy rapidly in flux, we felt adoption rates may quickly increase in areas like ecommerce, telemedicine and blockchain technologies—these are some of the main areas of focus in the fund.
Beyond the Tesla headlines the fund is well known for, what has been remarkable to watch is the growth in firms like Moderna, Square and DocuSign. None of those four firms were included in the S&P 500 Index up to this point, so investors who thought they were well-diversified may have missed out on their performance.
Secondly, we felt comfortable with a high conviction fund as a smaller complement to our core broad market allocation. This fund has the potential to move the dial in terms of performance, and is not a watered-down exposure to these themes.
Finally, we value that the fund’s portfolio manager, Cathie Wood, has built a diverse group of managers and analysts, and has been very transparent with their research and thinking; all elements we hope to see more of from the industry going forward.
It will be tough to continue the magic of 2020 for this fund, but when you look at their track record and the unique holdings, the potential is at least there.
Marguerita Cheng, CEO, Blue Ocean Global Wealth, Gaithersburg, Maryland
Top ETF Picks: First Trust Capital Strength ETF (FTCS) and First Trust NASDAQ Cybersecurity ETF (CIBR)
FTCS is large cap core fund that invests in companies with the strongest balance sheets. These are quality stocks. This is a core holding.
CIBR invests in cybersecurity. We need to have cybersecurity to allow individuals to access information in a safe and secure manner. This is an opportunity holding.
Cybersecurity is the protection of internet-connected systems such as hardware, software and data from cyberthreats. The practice is used by individuals and enterprises to protect against unauthorized access to data centers and other computerized systems. CIBR allows clients to access cybersecurity companies with diversification and transparency.
Charts courtesy of StocksCharts.com
Big Picture Themes For 2021
Andrew Musbach, co-founder & financial advisor, MD Wealth Management in Chelsea, Michigan
The biggest theme heading into 2021 is around small cap and value stocks. Historically, small cap value as an asset class has produced the highest long-term average returns. Of course, the caveat is that you’ve had to be extremely patient to capture these higher returns, including enduring long periods of underperformance interspersed with periods of outperformance.
Remember that the reason small cap and value stocks tend to perform better over time is because of two relatively simple concepts: First, the idea that risk and reward are correlated. If you take on more risk (i.e., investing in “riskier” smaller companies), you should be compensated with a higher return. Second, the idea of buying stocks at a discount. If you buy a stock when it’s “on sale” (value) and pay a relatively cheap price for it, you should realize higher subsequent returns.
Regarding the first point, if you think about lending money to a company, would you rather lend it to Amazon or a small company that you’ve never heard of? Most people would pick Amazon, and because of that, investors need to be enticed to choose the alternative. Risk and reward tend to be correlated, and the market needs to reward investors who take on more “risk” by investing in smaller companies.
Regarding the second point, people often confuse investing in a good company with realizing a good investment return. In other words, people discount how the price at which they buy an investment impacts their subsequent return. Just like you would have realized better investment returns in 2020 if you invested when the market was temporarily down 30% or more from its high, the same holds true with buying stocks at a relatively lower valuation.
Over the past decade, U.S. large growth and tech companies, as a group, have had the best relative outperformance. This has created an opportunity whereby valuations have made small cap value companies particularly attractive on a relative basis moving forward. We’ve already seen the prior trend begin to reverse since the market bottom on March 23, and based on current relative valuations, along with the historically higher expected returns for small cap value, there should continue to be a great opportunity in the space.
(Editor’s note: Check out the funds available to you here: Small Cap ETFs and Value ETFs.)
Contact Cinthia Murphy at [email protected]